Automakers Fuel Japan’s Longest Profit Growth Streak Since 2007

Japanese exporters led by Toyota
Motor Corp. (7203) are set to report higher third-quarter profit as a
weaker yen fuels the country’s longest stretch of earnings
growth since 2007.

Net income for Japan’s largest non-financial companies
probably rose about 52 percent in the three months ended
December, a fifth straight quarter of aggregate increase, data
compiled by Bloomberg show. Earnings almost doubled on average
in each of the previous four quarters, nine times faster than
the Standard & Poor’s 500.

Toyota, the world’s most profitable automaker, is set to
report an estimated fourfold increase for the quarter after
vehicle demand jumped in the U.S. and recovered in China.
Panasonic Corp. (6752) and Hitachi Ltd. (6501), Japan’s two biggest employers
after Toyota, are also benefiting as rising profits bring Prime
Minister Shinzo Abe closer to ending 15 years of deflation.

“It has definitely been a while since we’ve seen a steady
growth streak this long,” Hisao Matsuura, a strategist at
Nomura Securities Co., said by phone. “The risks that affected
things until last year -- the debt crisis in Europe, natural
disasters, emerging markets slowdown and U.S. uncertainty --
have gone.”

Growth in the past five quarters is also stronger than the
previous gain of that duration. Net income rose 83 percent on
average in the past five periods, compared with the 14 percent
average over the five quarters ending in March 2007, data
compiled by Bloomberg show.

Yen Effect

The growth comes as a weaker yen boosts the value of
overseas earnings, especially at companies that had already cut
costs to cope with a currency near a postwar high over the
previous year. The dollar averaged 98 yen in 2013, compared with
80 yen in 2012. The average so far this year is about 104 yen.

The figures are based on earnings and projections for all
414 non-financial companies on the Topix index for which
quarterly data back to March 2006 and estimates for the quarter
ended in December are available.

Net income probably climbed about 40 percent in the three
months ended December for companies on the Russell/Nomura Large
Cap Index, excluding financial firms, Nomura estimates. The
period will be the first quarter of slowing growth since the
fourth quarter of 2011, the Nomura forecast shows.

Higher Base

The wave of rising profit comes amid sales and output
growth at carmakers combined with the increasing use of
electronic parts such sensors, batteries and cameras, benefiting
some of Japan’s biggest manufacturers.

Panasonic, recovering from two straight annual losses,
counted on automotive systems for 37 percent of revenue in the
three months ended September, the biggest contributor. Sales of
car systems including lithium-ion batteries, drive control
systems and parking cameras were 650 billion yen ($6.3 billion)
in the period, more than triple the 188 billion yen a year
earlier.

The maker of televisions, cameras, solar panels and home
appliances expects to double auto-related revenue to 2 trillion
yen by March 2019 and is in talks with car-parts makers for
acquisitions and alliances, Yoshihiko Yamada, head of the auto
and industrial systems unit, said in an interview last month.

Hitachi, an industrial group that makes everything from
power-plant equipment to telecommunications gear and auto parts,
more than tripled net income to about 70 billion yen in the
three months ended December, according to the average of four
estimates compiled by Bloomberg.

Abenomics Winners

Abenomics, the prime minister’s program of monetary easing
that weakened the currency, stimulus spending and advocacy of
wage increases, is starting to show benefits for companies,
Hitachi Executive Vice President Toyoaki Nakamura told reporters
in October when the company reported second-quarter earnings.
Demand for car parts in the U.S. and China is also boosting
profit, he said.

The profit surge has yet to prompt wage increases that Abe
and economists have said are needed to sustain growth. While the
prime minister has called for incomes to advance more quickly
than inflation, prices will jump five times faster than wages in
the fiscal year starting in April, according to a Bloomberg
survey in December.

Electronics Woes

Consumer electronics makers including Sony Corp. (6758), Nintendo
Co. and Sharp Corp. are still struggling as demand for TVs,
personal computers and cameras slumps and casual video-game
players shift to cheap or free titles played on smartphones.

Nintendo will probably report net income fell 9 percent to
38.7 billion yen for the three months ended December, based on
the average of five analyst estimates compiled by Bloomberg.

The maker of Wii U consoles and the Mario and Zelda games
on Jan. 17 forecast a surprise 35 billion-yen annual loss,
blaming poor sales of the console.

Sony will probably report net income of 24.5 billion yen in
the three months ended December, compared with a 10.8 billion-yen loss a year earlier, based on the average of three analyst
estimates compiled by Bloomberg.

Competition from South Korea’s Samsung Electronics Co. and
Apple Inc. for smartphone sales and the shift by consumers to
tablets away from PCs have sidelined Japan’s iconic device
makers amid the broad recovery of manufacturers in the country.

Growth Outlook

The rebound in spending, a 73 percent surge in the Nikkei
225 since mid-November 2012 and the weaker Japanese currency are
also driving up consumer prices.

The Bank of Japan on Jan. 22 maintained its forecast that
core consumer prices will rise 1.9 percent in the year starting
April 2015.

The central bank’s estimate, which scrapped references to
the economy facing “uncertainty,” excludes the effect of a
planned sales-tax increase to 8 percent in April.

The jump will probably damp earnings (TPX) growth in the first
half of the year, said Matsuura of Nomura.

“By around July, growth should be back on the current
track,” Matsuura said.

Deflation’s End

Earnings expansion may push the Nikkei 225 to 18,000 yen
this year, according to Nomura’s 2014 outlook for Japan. The
benchmark rose 1.5 percent to 15,209.19 yen as of 9:09 a.m. in
Tokyo.

Japan’s 15-year bout with deflation has seen a series of
economic recoveries vanish after a few quarters. The previous
surge from 2005 to 2007 briefly lifted the Nikkei 225 above
18,000 yen, before the collapse of Lehman Brothers Holdings Inc.
in September 2007 sparked the global credit meltdown and
recession that dragged the benchmark to below 7,000 yen intraday
in 2009.

Japan Inc.’s recovery from the Lehman shock was cut short
by its March 2011 earthquake, tsunami and nuclear crisis. The
rebound from that disaster was stymied when floods in Thailand
disrupted production at makers of auto parts, hard drives and
electronics components supplied to carmakers and consumer
electronics companies based in Japan.

After that, Europe’s credit crisis and a yen that stayed
near a postwar high held back expansion at some of Japan’s
biggest exporters.

The economy probably grew 3.6 percent in the third quarter,
on an annualized basis, according to a Bloomberg survey of
economists. That would be the fifth quarter of growth, the
longest expansion since the six quarters beginning in 2005.

“This recovery is different,” said Ryuta Otsuka, a
strategist at Toyo Securities Co. “Consumer sentiment is very
good, spending is growing and so I don’t think the sales tax
will have a big impact.”